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A beginner’s guide to green mortgages

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As attention shifts towards energy-efficiency and sustainability, lenders have also been increasingly tapping into this trend. Here’s what you need to know about green mortgages.

Green mortgages have been around since 2018 when Barclays became the first lender to launch a product in this category.

Five years on and the industry has expanded, with a total of 14 lenders offering green mortgage deals, up from the seven recorded in April 2021, according to business information and ratings site Defaqto.

However, while there may be more lenders and products available, green mortgages remain a mystery to most borrowers, a survey by the Mortgage Advice Bureau revealed at the end of last year.

So, here’s a mini guide to green mortgages to help you understand what they are and whether they’re the right product for you and your property.

What are green mortgages?

Green mortgages are designed to offer borrowers preferential terms, rates or incentives such as cashback when buying a property that meets certain environmental standards.

They’re typically aimed at new build properties that have a high energy efficiency rating, generally an A or B on the Energy Performance Certificate (EPC) scale, according to Katie Brain, consumer banking expert at Defaqto.

However, some lenders offer green mortgages for homes with a rating of C or above, and they can also be used for properties where they have been renovated to improve their environmental performance, such as with solar panels or insulation, she adds.

If you’re not looking to buy a new build home, then some green mortgage deals could offer you an incentive to improve the energy performance of an existing property.

Brain says: “Some lenders offer ‘green’ further advance products for borrowers looking to improve the energy efficiency of their property, typically offering a lower initial interest rate than standard further lending provided the additional lending is used for green purposes.”

How do you get a green mortgage?

Green mortgages are widely available through brokers and directly through lenders. Banking giants including Barclays, Halifax, Nationwide, NatWest, and Virgin Money all offer various deals.

Meanwhile, retirement specialist Just Group also launched the first green lifetime mortgage in 2021.

Are the rates on green mortgages better than standard deals?

As with standard lending, rates have been climbing since the start of 2021, with Defaqto data showing the average fixed rate for a two-year green mortgage standing at 1.97% in December 2021, 2.92% in June 2021 and rising to 6.01% in December 2022 in the aftermath of the disastrous mini-Budget. Average five-year rates have risen from 2.15% in December 2021, to 2.93% in June and 5.66% in December.

Meanwhile, those looking at an average 10-year green mortgage fix saw rates of 2.51% in December 2021, 2.72% in June and 5.32% in December 2022.

However, average rates have started to settle back down with borrowers seeing an average 5.64%, 5.22% and 4.57% on the respective two-year, five-year and 10-year deals.

Defaqto says it started to see a bit more of a difference in the interest rate for a fixed rate product available for a new build property versus mainstream lending for lower LTVs in the latter part of 2022.

As an example, a previous Virgin Money best buy five-year fixed rate was 4.99% but for new build buyers, the rate offered was 4.88% and it gave £300 cashback.

However, even though they are supposed to offer an incentive to buy a property which is more energy efficient, Brain says this isn’t always the case.

According to its best buy data (to 5 January 2023), the current top five-year green mortgage from Halifax stands at 5.09% (95% LTV), comes with zero fees and offers £250 cashback.

Meanwhile, the best buy five-year standard mortgage (95% LTV) – also from Halifax – has a rate of 5.09% and comes with zero fees, so the only incentive to going ‘green’ is the £250 cashback.

Elsewhere, borrowers may ‘pay more’ by going green. As an example, Defaqto lists Newcastle Building Society as offering the best buy five-year mortgage deal (80% LTV) at 4.7% (no fees).

Meanwhile, the green mortgage equivalent stands at 4.79% from Halifax, with the £250 cashback.

For borrowers, it may be worthwhile seeing what rates brokers can offer as they may be able to tap in to special deals for homebuyers.

What about buy-to-let?

Green mortgages are available on a buy-to-let basis. In fact, green buy-to-let mortgage choice reached a record high last year, from just four in 2021 to more than 350 in 2022.

Here, lenders were seemingly focusing on greener products for landlords, partly due to the Government’s commitment to make Britain carbon neutral by 2050, and on account of EPC rules for these properties.

Brain explains: “A number of BTL regulations have been introduced for minimum EPC requirements.

“Legislation was introduced in 2018 that means all residential BTL properties have to have an EPC rating of at least an E (to hold a mortgage on that property).

“As of 2025, all BTL property starting a new tenancy will require an EPC rating of ‘C’. Existing tenancies have until 2028.”

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